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Are you familiar with the term restaurant prime cost?
It’s a critically important metric that can give you an overall sense of how your restaurant is performing.
But why exactly is it so important to have a clear understanding of what your restaurant prime cost is? What should your prime cost be? And how can you reduce your prime cost?
Let’s answer all of those questions right now.
Let’s make sure we’re all on the same page regarding what restaurant prime cost is.
Restaurant prime cost is the total cost of goods sold (COGS) plus labour costs.
Cost of goods sold includes all the expenses that go into making a dish or drink, such as ingredients and packaging. Labour costs include wages, employee benefits, workers’ compensation, and other payroll expenses for employees working in the restaurant.
Prime costs do NOT include:
Prime costs are sometimes called “controllable costs” because they can be controlled by restaurant operators and managers. These costs make up a significant portion of a restaurant’s expenses and are crucial to monitor and manage in order to maintain profitability.
There are a number of key reasons that prime cost is important. In order to run your restaurant effectively, you need to understand exactly how prime costs impact your business.
Prime costs are your largest expenses. If you lower your prime costs, you will see a direct impact on your bottom line. When you track prime costs, you can make strategic decisions to reduce expenses and increase profits.
Jim Laube, Founder and CEO of RestaurantOwner.com, notes:
25-plus years of experience in the restaurant industry has led me to believe that uncontrolled food, beverage and labour costs are key contributing factors in the underperformance and eventual failure of just as many restaurants as undercapitalisation, poor location and having an ill-conceived concept.
Your prime costs directly impact multiple areas of operation in your business. They impact:
Because prime costs impact so many areas of your business, it’s essential that you have a solid grasp of what your prime costs are. You can’t run a profitable business if you don’t control your prime costs effectively.
Your profit margin is the difference between your revenue and expenses. The higher your prime costs, the lower your profit margin will be. By reducing your prime costs, you increase your profit margin and ultimately make more money. In fact, restaurant owners who monitor their prime costs on a weekly basis add on average between 2% – 5% to their bottom line.
On the other hand, if you aren’t firmly controlling prime costs, you’ll see your profit margins shrink, which will directly impact your bottom line. If this goes on for a significant length of time, you’ll find yourself in a precarious position financially.
When it comes to increasing a restaurant’s profits, many owners think in terms of increasing sales through marketing, loyalty programs, etc. And there certainly is a place for this. But eventually, you’ll reach the point where you’re operating at max capacity and can’t increase sales anymore without sacrificing the customer experience.
In this case, there are only a few ways you can continue to increase profits, and decreasing your prime costs is one of them.
As noted above, a key aspect of prime costs is that they can be controlled. Unlike fixed costs, which are expenses that you cannot change, prime costs can be reduced through strategic decision-making.
By implementing cost-saving measures and closely monitoring your prime costs, you keep your business financially healthy.
When it comes to budgeting and forecasting for your restaurant, prime costs are a critical factor to consider. By understanding your prime costs, you’re able to accurately forecast future expenses and make informed decisions about where to allocate resources. This is especially important in times of economic uncertainty or when trying to grow your business.
AI demand forecasting tools, such as those offered by Fourth, can help restaurant business owners and operators accurately predict future prime costs based on historical data and market trends. This can greatly aid in budgeting and decision-making processes and can result in significantly lower prime costs.
How do you ensure that you price your dishes and menu items appropriately to cover your prime costs and still make a profit? By understanding your prime costs, you’re able to set prices that not only cover your expenses but also provide a reasonable profit margin.
Furthermore, closely monitoring your prime costs will allow you to adjust prices accordingly if there are any changes in food costs or labor expenses. This adaptability is crucial in the ever-changing landscape of the restaurant industry.
Now, let’s look at how to specifically calculate your prime cost number.
The formula for calculating prime cost is as follows:
PRIME COSTS = COGS + Labour Costs
Cost of Goods Sold includes all the direct costs associated with producing a dish or menu item. This includes ingredients, packaging, and any other related expenses. To calculate COGS for a specific time period, you would use the following formula:
COGS = Beginning Inventory + Purchases – Ending Inventory
Beginning inventory is the amount of inventory you have at the start of a period. Ending inventory is the amount of inventory you have at the end of a period. Purchases refer to the cost of any items purchased during the specified time frame.
So, let’s say you have £10,000 in inventory at the beginning of the time period. You purchase £3,000 worth of inventory during that time period. At the end of the period, you take inventory again and learn that you have £6,000 worth of inventory. Your COGS is £7,000.
£10,000 + £3,000 – £6,000 = £7,000
Labor costs include all wages and related expenses for your employees, including payroll taxes and benefits. To calculate labour costs for a specific time period, use the following formula:
Labour Costs = Wages + Payroll Expenses + Benefits
Wages refer to the amount paid to employees for their work. Make sure to include both salaries and hourly wages. Payroll expenses include payments that an employer is required to pay on behalf of their employees such as national insurance. Benefits include things like pensions, salary sacrifice other benefits offered to employees.
You may need to work with your accountant to get the exact numbers included in your labour cost.
For the sake of this example, let’s say that your total labour costs over the period in question are £5,000.
Now, let’s put everything together. Based on the numbers above, your prime costs would be:
£7,000 + £5,000 = £12,000
On its own, this number doesn’t tell us much. We also need to know our prime cost percentage, which tells us how much of our total sales are going towards prime costs. To calculate the prime cost percentage, use the following formula:
Prime Cost Percentage = Prime Costs / Total Sales x 100
Let’s say that your total sales for the time period were £20,000. Your prime cost percentage would be:
£12,000 / £20,000 x 100 = 60%
This means that 60% of your sales are being eaten up by prime costs.
The generally accepted industry benchmark for prime cost is 60%. When prime costs start to climb to 65% and above, profitability issues can arise.
You would think that the lower the prime cost, the better right? Well, not exactly. Say you hit a prime cost of 50%. That could mean you’re doing an amazing job of controlling your expenses and running a “lean” restaurant. Or it could mean that you’re cutting costs too much, reducing food quality, and overworking your staff, all of which will hurt the customer experience.
So while you should certainly actively monitor and seek to control your prime cost, it’s important to do so in a way that doesn’t compromise the quality and experience of your restaurant.
There are several reasons your prime cost might be trending upward.
If your menu prices aren’t reflective of the costs involved in creating various dishes, there’s a good chance your prime cost will be high. This is why it’s essential to understand how much it costs to produce each dish and the cost of all the ingredients involved.
If inventory costs increase without an accompanying increase in menu prices, your prime cost will go up.
Labour costs are a major component of prime cost. If your scheduling isn’t optimised and you have too many staff on during slow periods or not enough during busy times, this can significantly impact your prime cost.
It can also directly impact the customer and employee experience. Being short-staffed contributes to long wait times and poor service. It also leads to frustrated employees who can’t keep up with the demands of the job.
Restaurant operators must deal with theft, both in terms of inventory and time. Inventory theft is exactly what it sounds like – employees taking food or supplies without paying for them. Time theft occurs when one employee clocks in for another who is not there – something known as “buddy punching”.
Both forms of theft can significantly impact your prime cost and bottom line. It’s important to have systems in place to prevent and catch any potential theft.
Inventory costs are directly related to prime cost, and increasing inventory costs will raise your prime cost. This is why it’s essential to have a robust restaurant inventory management system in place that allows you to closely monitor and control inventory levels, as well as stay on top of all supplier transactions.
So, how can you, a restaurant operator, reduce your prime cost? What are some concrete steps you can take to make your restaurant more profitable? There are a number.
It’s hard to overstate how important accurate demand forecasting is when it comes to reducing prime cost. You need to have accurate demand forecasts to ensure you order the right amount of inventory, prep the right amount of food, and schedule the right amount of labour. Without an accurate forecast, you’re just guessing, and guesses are often wrong by significant amounts.
To lower your prime cost, invest in AI demand forecasting solutions like those offered by Fourth. Fourth’s AI Forecasting engine utilises cutting-edge machine learning algorithms to analyse your company’s data, identify patterns, learn trends, and detect outliers.
With these valuable insights, you can confidently anticipate future demand and effectively plan ahead.
Doing menu engineering is crucial if you want to reduce your prime cost. Menu engineering is the process of determining how much each dish on your menu costs to make and how much profit it generates. By analysing this data, along with sales data, you can determine which dishes are the most profitable and which ones need to be either revamped or removed from your menu altogether.
Investing in tech tools like Fourth’s Inventory Management can aid in this ongoing analysis by providing real-time data about sales, costs, and profitability. With these insights, you can make more informed decisions, helping to reduce prime costs and increase profitability over time.
It’s extremely difficult to effectively manage your inventory without robust restaurant inventory management software. Ineffective restaurant inventory management results in a host of problems that drive up prime costs, including:
A strong restaurant inventory management system enables you to closely monitor and control inventory levels, track costs, and streamline ordering. With Fourth’s restaurant inventory management software, you can easily identify areas of waste or inefficiency and make data-driven decisions to reduce prime costs.
It’s important to regularly reevaluate your supplier relationships and negotiate for better terms. This is especially the case if you notice that your inventory costs are rising.
Negotiations could include discounts, extended payment terms, or better-quality products. But don’t just focus on the cost of goods – also consider the level of service and support your supplier provides. Taking the time to find a reliable, responsive supplier can save you money and headaches in the long run.
As noted above, both inventory and time theft can cause prime costs to rise. Implementing theft protection measures, such as surveillance cameras and inventory tracking systems, can help deter employee theft. Additionally, implementing strict cash-handling procedures can help prevent financial fraud.
Time theft can be prevented using employee scheduling tools like Fourth’s eClock. This can help ensure that you are only paying for actual hours worked, reducing labour costs and potential time theft.
Food waste is often a big problem for restaurants, both in terms of environmental impact and cost. In fact, according to US study from the Green Restaurant Association, a restaurant can produce up to 25,000 – 75,000 pounds (11,000-34,000 kilos) of food waste a year.
While some food waste is inevitable, the amount of food wasted in your restaurant directly impacts your prime cost and your bottom line. High amounts of food waste typically mean higher inventory costs.
So, how can you reduce food waste in your restaurant? Consider:
By reducing food waste, you can not only improve your prime cost but also contribute to a more sustainable operation.
Labour costs make up a significant portion of your prime cost. This is where employee scheduling software, like Fourth, can make a big difference.
By using automation and data analysis, you’re able to create efficient schedules that align with your forecasted demand, reducing labour costs while ensuring proper staffing levels.
Additionally, features such as shift swapping and time-off requests allow for better communication and flexibility between managers and employees, ultimately improving employee satisfaction and retention. And compliance notifications help ensure that you are following labour laws and avoiding costly penalties.
As a restaurant owner or operator, it’s crucial to stay on top of your prime cost. By understanding what it is and how to reduce it, you can improve your overall profitability and set your business up for long-term success.
Remember, reducing prime costs doesn’t mean sacrificing quality. With the right tools and strategies in place, you can control your costs while still delivering exceptional food and service to your customers. With the help of AI forecasting, scheduling tools, and inventory management software, you can streamline your operations and make data-driven decisions that contribute to a more profitable restaurant.
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